Despite the scepticism in Brussels, the British government and financial lobbies TheCityUK, City of London financial district and UK Finance banking lobby, are unified in backing a "mutual recognition" blueprint for EU market access after Britain's departure from the bloc next March.

This involves Britain and the EU agreeing to accept each other's financial rules in return for two-way market access for banks, insurers and asset managers under a bespoke trade agreement.

But a trade deal of this sort has never been done before in financial services, and the EU has said only that it could improve the bloc's existing "equivalence" system.

Britain rejects this because access is granted at the sole discretion of Brussels. It can be scrapped at short notice and would force Britain to keep copying EU rules.

Unlike the other industry bodies based in London, the Association for Financial Markets in Europe (AFME) has so far not formally backed mutual recognition, its chairman Michael Cole-Fontayn said.

He signaled an openness among members, who include Goldman Sachs and Morgan Stanley banks, top asset manager BlackRock, and British lenders HSBC and Barclays, to build on equivalence.

"We are pragmatic in recognizing that markets will and need to continue to function," Cole-Fontayn told Reuters.

"The negotiations are highly political but we would naturally want to be constructive in providing input into whatever model is ultimately taken forward to seek the most optimal outcome possible under the political constraints."

'E' FOR EUROPE

London's financial sector has sought to stay "on message" and dismiss alternatives to mutual recognition, but AFME says it was taking a broad view given its remit.

"There is a very important and big letter in our name, and that is the E in AFME. That makes our voice distinct, particularly as we operate in a global context as well," Cole-Fontayn said.

AFME hopes its active backing for the EU's capital markets union project to raise more funds for the economy by issuing stocks and bonds will help convince the EU to offer Britain good trading terms.

"We have an eye on the future of the capital markets union's success and ensuring as much of the integrity of the pan-European capital market area as is possible," Cole-Fontayn said.

AFME is taking part in consultations by the European Commission and European Parliament to reform equivalence. Luxembourg is keen to make equivalence more flexible, but France is more cautious.

Countries that already have equivalence arrangements are watching closely.

"The relationship that the EU and Britain strike must be seen in a global context, and it must be seen in a context that equivalence impacts Japan, Singapore and the United States as much as it impacts the UK," Cole-Fontayn said.

AFME members are not relying on market access being agreed and plan to open new hubs or expand existing ones in the bloc by next March. A good trade deal could mean moving fewer staff and activities from London to those hubs over time.

(Reporting by Huw Jones; Editing by Hugh Lawson)

By Huw Jones